Cash for Clunkers drives up price of used cars

As was predicted last year, Cash for Clunkers, the government sponsored program that gave consumers a credit for their trade in when they bought a new car, has distorted the used car market by driving up the price:

Car buyers on average paid $1,800 more for a used vehicle in July than they paid a year ago at this time, according to Edmunds.com data. That’s a 10.3 percent increase, bringing the average cost of a 3-year-old vehicle to $19,248. The price of a Cadillac Escalade spiked nearly 36 percent. “A lack of confidence in the economy is driving more people to used cars, putting upward pricing pressure on a limited supply of vehicles,” said Joe Spina, a senior analyst for Edmunds.

There’s a tricky aspect to this analysis, because last summer was marked by a used-car buying frenzy spawned by the Cash for Clunkers program. Spina said the effects of that program are hard to isolate precisely. “So many economic factors affect automobile sales and prices. It’s believed that the program delayed purchases prior to the program and also pulled sales forward while in place,” he said. “The program also eliminated inventory of older vehicles that were traded and then scrapped.” After the jump, take a look at the vehicles whose prices moved the most this July. The model years have been averaged. You can also get some advice on how to proceed in a (relatively) pricey used-car market.

Spina said that at this time last year, a troubled economy had consumers buying less- expensive fuel-efficient vehicles and trading in “gas guzzlers” through Cash for Clunkers (more formally known as the Car Allowance Rebate System). “Now, those who need trucks and large SUVs are buying them and in many cases are turning to used vehicles as a way to save money,” he said. ”Prices are high because this demand comes at a time when inventory is low as a result of the current shortage of lease returns and trade-ins for vehicles of this type.” And, he said, while prices are indeed very high now, last year’s prices were low, making the gains even more dramatic.

We shouldn’t be surprised by this. Used cars that were traded in as a part of Cash for Clunkers were disabled by essentially killing the engines. A basic law of economics is that reducing the supply of a good only drives up the cost. Taking 690,000 cars off of the market is going to have an impact.